Perhaps one of the best parts about owning your own home is the fact that home ownership, unlike renting, allows you to build equity in your home. Equity is defined as the difference between a home’s fair market value and the outstanding balance of all liens on the property. Your home will build equity as you make payments towards the mortgage and will continue to increase as you continue to make payments. Building home equity is important for many reasons. As a homeowner who has equity built up in their home, you’re able to use that equity as a line of credit, or collateral to obtain loans for other uses. It’s extremely important for a homeowner to thoroughly understand the basics of home equity in order to be able to make well-informed financial decisions.
To begin with, a homeowner must understand the difference between a home equity line of credit and a home equity loan, two terms that they will definitely see. A home equity line of credit is basically the amount of money that a homeowner has paid off, no longer owed to the lien holder. For example, if your home is worth $100,000 and you’ve paid $20,000 towards the loan, your home equity line of credit is $20,000. That $20,000 can be used as collateral for loans for things like home repairs, bills, travel and any other personal uses. A home equity loan is a loan that uses the home equity line of credit as collateral. Basically, the homeowner is putting up their home as collateral to obtain the loan.
A home equity line of credit is basically the amount of money that is available for a person to borrow against. In a lot of ways, it is similar to a credit card. Just like a credit card purchase, a home equity loan incurs interest, has penalties for late and/or missed payments and has a limit on the amount of money that can be borrowed.
There are a few things that can impact what type of home equity credit loan that a person qualifies for. Perhaps, the most important factor is a person’s credit score. Your credit score, which reflects your credit worthiness, can determine what your interest rates are. In some cases, a person may not be able to get a loan at all, simply because their credit score is too low which makes them a risk.